UPDATE 1-India cbank chief warns on record current account gap

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Last Updated: Mon, Feb 11, 2013 13:00 hrs

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MUMBAI, Feb 11 (Reuters) - India's current account deficit
is likely to reach a record high in the fiscal year that ends in
March, its central bank governor warned, a gap which the bank
said previously needed to shrink for it to cut interest rates
further.

Reserve Bank of India Governor Duvvuri Subbarao said in a
speech on Monday the country needed more foreign investment in
assets such as plants and equipment rather than in its equity
and debt markets, which investors can withdraw quickly.

"We are financing our current account deficit through
increasingly volatile flows. Instead we should ideally be
getting as much foreign direct investment as possible to finance
the current account deficit," he said.

India's current account gap widened to a record high of 5.4
percent of GDP in the September quarter.

The Reserve Bank of India cut interest rates for the first
time in nine months last month but warned at the time that a
lower current account deficit and easing inflation would be
needed for it to make more cuts.

In the previous fiscal year, India's current account deficit
was 4.2 percent of GDP, and economists are expecting it to be
close to 5 percent of GDP for the current fiscal year.

"Today, the external sector is vulnerable," Subbarao said.

"We would not worry so much if the current account deficit
was on account of import of capital goods. But here we are
having a current account deficit because of import of oil,
because of import of gold," he said.

India recently raised import tariffs on gold in order to
slow imports.
(Reporting by Shamik Paul; editing by Jane Baird)